This is an entirely free service. No payments are to be made. Also send me The Ultimate Guide to Profiting From Derivatives and sign me up for Profit Hunter,a free newsletter that focuses on identifying short term money making opportunities.Download NowSubscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.

Mah Fin.: NIMs up despite higher costs

Oct 28, 2011

Mahindra Finance declared its results for the second quarter of the financial year 2011-12 (2QFY12). The company has reported a 39% growth in interest income while net profits have grown by 11% YoY. Here is our analysis of the results.

Performance summary

Interest income grows by 39% YoY 2QFY12, and 40% in 1HFY12.

Advances grow by 52% in the 1HFY12. Assets under management grow by 41% YoY.

Net NPAs to total advances improve marginally to 1% in 1HFY12 from 1.1% previously.

Net interest margins increased from 5.5% in 1HFY11 to 6.3% in 1HFY12 due to higher lending yields.

Bottomline grows by 19% YoY during 1HFY12 and 10.6% during the 2QFY12 largely on the back of higher interest costs and provisioning.

Capital adequacy ratio stands at 17.3% at the end of 1HFY12.

Consolidated performance snapshot

Rs (m)

2QFY11

2QFY12

Change

1HFY11

1HFY12

Change

Interest income

4,858

6,773

39.4%

8,902

12,495

40.4%

Interest expense

1,531

2,627

71.6%

2,859

4,812

68.3%

Net Interest Income

3,327

4,146

24.6%

6,043

7,683

27.1%

Net interest margin

5.5%

6.3%

Other Income

74

91

23.5%

156

215

37.7%

Other Expense

1,182

1,601

35.5%

2,208

3,084

39.7%

Provisions and contingencies

369

594

60.8%

945

1,209

27.9%

Profit before tax

1,850

2,043

10.4%

3,046

3,605

18.4%

Tax

615

677

10.0%

1,011

1,180

16.8%

Profit after tax/ (loss)

1,235

1,366

10.6%

2,035

2,424

19.1%

Net profit margin (%)

25.4%

20.2%

22.9%

19.4%

No. of shares (m)

104.0

Book value per share (Rs)*

266.0

Price to book value (x)*

2.5

* Book value as on 30th September 2011

What has driven performance in 1HFY12?

Robust rural cashflows and a better monsoon during the year contributed to a good performance for the lender. Customer contracts increased by 25% during the first half. Despite multiple rate hikes, the lender still managed to grow its advances by 51.6% in 1HFY12. The company also added over 20 new branches during the first half to be able to capture higher growth expected in the second half of the year (festival season). The rural market for vehicles continues to be more buoyant that the urban market. Most car manufacturers are looking at rural India to offset slowing growth in urban areas, and Mahindra Finance is thus a key beneficiary of this shift. Having said that we clearly do not see the current growth rates being sustainable for the longer term.

Dynamic growth...

(Rs m)

1HFY11

% of total

1HFY12

% of total

Change

Advances

107,887

163,517

51.6%

Borrowings

82,935

127,474

53.7%

Secured

63,753

76.9%

98,324

77.1%

54.2%

Unsecured

19,182

23.1%

29,150

22.9%

52.0%

Credit borrowing ratio

130.1%

128.3%

Mahindra Finance, which was once predominantly a financer of tractors and utility vehicles sold by M&M, now has an almost 50:50 mix of M&M and non M&M vehicles, thus de-risking its portfolio to some extent. It saw most of its incremental disbursements go to cars and commercial vehicles.

Disbursement mix

(%)

1HFY11

1HFY12

Auto / utility vehicles

30

27

Tractors

21

20

Cars/Others**

33

32

Commercial vehicles

7

11

Used vehicles & others

9

10

** Others include non-M&M utility vehicles

NPAs (non-performing assets) at the gross level moved lower from 5.8% in 1HFY11 to 4% in 1HFY12. Also, due to higher provisioning, the net NPA were lower at 1.0% at the end of 1HFY12 as compared to 1.1% of total assets at the end of 1HFY11. The provision coverage ratio was 75.3% at the end of 1HFY12. The company has invested in a legal system in a number of states, which has helped it recover some of its bad loans.

Its capital adequacy stands at over 17% currently and thus capital raising on the Tier 1 front (currently 14.7%) is not in the offing in the near term. However the company may use its Tier II headroom or securitization of assets can be done as and when the regulation gets more streamlined.

What to expect?

At the current price of Rs 670.7, the stock is trading at a multiple of 1.9 times our estimated FY14 adjusted book value. The company has seen robust growth, despite a tough environment and high interest rates. While its rural customers were not as affected by the rate hikes, Mahindra Finance saw a huge spike in its cost of funds. Margins did not contract however as lending yields were also higher. But, this may not be sustainable as it will have to soon borrow money at higher rates.

Mahindra Finance is one of the preferred financiers for Maruti and lends for around 9,000 cars a month. Despite the prolonged strike at the Manesar plant, Mahindra Finance was not affected. However, due to expensive loans on account of the RBI's 13th rate hike, purchases of passenger cars may get affected. Rural demand for other vehicles may not dry up even with high interest rates. However, with the economy set for a slowdown, and the RBI revising its projections for growth downwards, rural cash flows may get affected. Thus, going forward loan growth may get moderated. In light of the current environment and its current valuations we reiterate our negative view on the stock.

OTHER USEFUL LINKS

MARKET STATS

ABOUT EQUITYMASTER

Since 1996, Equitymaster has been the source for honest and credible opinions on investing in India. With solid research and in-depth analysis Equitymaster is dedicated towards making its readers- smarter, more confident and richer every day. Here's why hundreds of thousands of readers spread across more than 70 countries Trust Equitymaster.

All rights reserved. Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.